Microsoft paying Nokia $1 billion to use WP7? Cheap at twice the price

Microsoft's $1 billion payment to Nokia to get the Finnish giant to switch to …

Bloomberg reported yesterday that Microsoft will end up paying Nokia more than $1 billion to promote and develop Windows Phone 7 handsets, citing two unnamed sources said to be knowledgable of the terms of the agreement. Nokia's commitment to the platform is also long-term: the agreement lasts more than five years, according to the sources. The people also confirmed that the final contract between the two companies still hasn't been signed. For this reason many of the details and specifics are still not public.

Microsoft will be paying some money up-front, and giving Nokia a share of advertising revenue. It will also be paying for its use of Nokia's Navteq mapping services. Offsetting this, Nokia will in turn pay Microsoft for each license it ships.

On the face of it, this sounds like a lot of money. A billion dollars just to stop Nokia plumping for Android, in a deal that isn't even exclusive—Nokia will continue to sell Symbian handsets, and even the MeeGo-powered N950 will ship later this year. Nor is a this deal going to be a quick win for Microsoft, as Nokia's Windows Phone 7 handsets aren't likely to ship in volume—or possibly even at all—until 2012.

In the short term, this deal certainly favors Nokia. The company will still be spending money on Symbian development—the company is expecting to ship 150 million of the handsets in the next couple of years—but will be able to scale back this expenditure, as its operating system development costs are increasingly pushed onto Redmond. This, plus the cash infusion, gives the company instant savings.

But longer term, this deal should prove to be a big win for Microsoft. With each license estimated to cost around $15, recouping the $1 billion will require about 60 million licenses—Nokia handsets—to be sold. And this is a five year deal: it doesn't have to be an overnight success to earn back the money. Unless Nokia implodes and the entire venture is disastrous, that level of sales should be easily achieved.

Strategically, it's even more valuable for Redmond. The Nokia deal gives Microsoft access to a brand with significant market presence around the world (except the US), valuable mapping services, and strong hardware skills. Perhaps even more importantly, the deal has ensured that the biggest smartphone manufacturer in the world has gone with Microsoft's operating system, and not Android.

The sources speaking to Bloomberg said that two features were influential in swinging the deal. As already disclosed when the companies announced the agreement, Nokia felt that Windows Phone 7 offered a greater chance to stand out in the market—something that would be rather harder in the already crowded Android market. But the investment that Microsoft could make was also key, with the implication that Google was unable or unwilling to offer a simliar incentive.

For users of the platform, the length of the deal is also encouraging. Windows Phone 7's future is far from assured. Microsoft's mobile ambitions—for Windows, for tablets, and for ARM processors—are currently something of a mystery. The company brutally killed off the KIN when it was clear that it had failed to meet expectations, and there were concerns that the company would give Windows Phone 7 the same treatment if it failed to take off. But in signing up to a five year deal, it's clear that Microsoft is in this for the long haul, and will stick with the platform to ensure its success.

There are still risks to the deal. The platform could still bomb, Nokia's handsets may all flop, or Nokia may decide that MeeGo has more to offer after all. Microsoft may have made concessions to the Finns that will undermine Windows Phone 7 as a platform. And alienation of the other Windows Phone 7 partners remains a possibility.

How these risks will play out is at the moment anyone's guess: Nokia has said that they don't intend to jeopardize the platform (though they could) and devalue the other Windows Phone 7 manufacturers, so they're saying the right things—we now have to wait to see if they follow through.

A billion dollars sounds like a lot. But to solidify Windows Phone 7's position for just a billion dollars—a billion dollars that should be earned back over the life of the deal—and to prevent Nokia from going with Android, it's an absolute bargain.

Very interesting and I'd love to see WP7 thrive. I tested a Samsung Focus for about a month before switching back to an iPhone, and I really enjoyed it, except that it didn't seem finished. I liked the OS and everything, it was just not as fast and not as many feature as iOS, but it seemed like if it was successful enough all the little tweaks would make it a great competitor. I'd love to give it another shot in a year or so.

This deal makes a little more sense from Nokia's perspective now. I am not sure if the $1 Bn offsets Nokia selling Android handsets, a platform which is already relatively mature over the next 1 year or so, but at least it doesn't feel like Nokia sold itself for cheap.

That being said, Android would have been a great investment for Nokia, because they could have also used it to power their low end phones, which they still do (and will continue to) sell a majority of in the world, spreading out the costs of Android dev even further.

I don't buy the "differentiate themselves in the market" argument. That is a euphemism for "the platform is not successful". And its a complete catch 22 in a 2-3 year timeline. If the platform allows them to continue "differentiating in the market" that means that the platform failed. If it is successful, then HTC, Samsung, LG, etc. will jump onto the WP7 bandwagon, and all that "differentiation" is lost. Go with Android, and they actually could differentiate themselves, just like HTC does with Sense, and Motorola with Blur.

The play is simple here. Nokia's American investors wanted returns. Layoff all the SW devs, possibly see a bump in smartphone sales over the next 2-3 years (when they are still "differentiated" in the market) and then cash out, as the market rises due to high quarterly profits. In the long run, Nokia is screwed. The frontloading of the cash from MS to Nokia is a clear sign of that (it will help mask the cost of SW for a year or 2, making it seem like Nokia's costs have gone down dramatically, and giving Elop a nice incentive bonus).

For MS, this is a brilliant move. An awesome way to give WP7 some desperately needed momentum.

Even if Microsoft gave nothing Nokia would be insane to switch to Android. You always want to stand out in the CE market as that is how you get margin. Just look at Apple vs Dell, Lenovo, HP etc. their margin kills the rest because they stand out.

Even if Microsoft gave nothing Nokia would be insane to switch to Android. You always want to stand out in the CE market as that is how you get margin. Just look at Apple vs Dell, Lenovo, HP etc. their margin kills the rest because they stand out.

How does WP7 allow Nokia to stand out, other than the fact that the platform is not a hit with consumers?

Reminds me of the scene from "Funny Farm" where Chevy Chase says, "If I can't make any friends, I'll goddamn buy one!"

The thing is though, it kind of works. God knows how much money Microsoft has sunk into the Xbox franchise, Kinect alone supposedly had a half billion dollar marketing budget, but they're winning in sales, Kinect beat sales estimates and now the 360 generally outsells the PS3 and Wii (although not according to the latest weekly figures on VGChartz, but that's thanks to Killzone 3).

They did it via brute force and didn't really bury the competition, but it got them up there to be a serious competitor.

Even if Microsoft gave nothing Nokia would be insane to switch to Android. You always want to stand out in the CE market as that is how you get margin. Just look at Apple vs Dell, Lenovo, HP etc. their margin kills the rest because they stand out.

How does WP7 allow Nokia to stand out, other than the fact that the platform is not a hit with consumers?

Personally, I think there would be a lot to be gained by Microsoft sticking to Nokia only.

Having Samsung, LG, HTC and the other shitty handset makers offering WP7 only makes sense if you don't have a major partner. By it being just WP7 and Nokia Microsoft gains Nokia's incredible market share, and Nokia gains a platform they don't have to care about (because, frankly, they're pretty bad with the whole platform thing).

Plus, a WP7 and Nokia monogamous relationship would allow for better features, with the manufacturer and software maker being able to better tailor their respective ends of the job to the other.

is there anything stopping nokia from "not trying very hard" i.e. they ship some win7 phones but they aren't much better than anyone else's, they don't sell even close to 60 million handsets, nokia gets to keep $1B? i imagine that's what still under negotiation.

is there anything stopping nokia from "not trying very hard" i.e. they ship some win7 phones but they aren't much better than anyone else's, they don't sell even close to 60 million handsets, nokia gets to keep $1B? i imagine that's what still under negotiation.

It's likely there will be targets Nokia has to meet or they're liable for penalties. Heck, I suspect the legal requirements of their prior deal with Intel on MeeGo is why MeeGo isn't being dropped completely right away.

1. Nokia is mostly WP7, but not entirely - still lots of Symbian devices being sold, and still working on MeeGo. That means the deal doesn't prevent Nokia from selling devices with other OSes. So if WP7 flops in 1 year, Nokia can refocus on MeeGo or possibly Android (unless the deal explicitly rules out Android, but if it does, that's a horrible deal for Nokia, and not a beneficial one for Microsoft - killing Nokia doesn't help it).

2. Who would want to build WP7 phones anymore? Clearly Nokia is the preferred WP7 manufacturer, and you can't really compete with that. Also, the OS costs $15 a pop (!) according to this article. So, expect WP7 to become basically Nokia-only, which is very bad for Microsoft if it wants any shot at competing with Android. It does, on the other hand, help to compete with iOS, as this is basically iOS's model (tightly integrated hardware, single provider). But Android is the target to beat, not iOS, going forward.

So why did Microsoft make this deal if it's so bad? I can only guess that without the deal, Microsoft was very worried about WP7's future. In other words, this is a long shot.

In summary, MS may get their $1B back over the term of the deal. They will still spend something of the same magnitude in development and support of the platform - not counting the work and the QA on the updaters, because they clearly don't spend much on these. So MS may break even, give or take a few hundred Mils.

If they put that $1B in, for example, Apple, Google, Salesforce, FB, Twitter, or any of the dozen other companies that get it, they would be much more likely to double their investment, or better. Their shareholders would be happier, and they might even make a few friends and learn a few things in the process.

Still, with apologies to the original creator and copyright holder of the phrase, I would say that the best would be to just give the money back to the shareholders.

Microsoft clearly has to spend big on marketing Windows Phone 7 to have a chance of establishing its presence. Microsoft's problem is the very substantial deterioration of their core competencies in system installation and user interface design. They are beginning to display a pattern of failure modes that I am all too familiar with. In the case where I saw those failure modes and a big budget attempt at sustaining market presence, the money did no good. Given Microsoft's recent pattern of failures, when I am feeling generous I give them about a fifty percent chance of establishing Windows Phone 7 as a substantial participant in the smart phone market.

Reminds me of the scene from "Funny Farm" where Chevy Chase says, "If I can't make any friends, I'll goddamn buy one!"

The thing is though, it kind of works. God knows how much money Microsoft has sunk into the Xbox franchise, Kinect alone supposedly had a half billion dollar marketing budget, but they're winning in sales, Kinect beat sales estimates and now the 360 generally outsells the PS3 and Wii (although not according to the latest weekly figures on VGChartz, but that's thanks to Killzone 3).

They did it via brute force and didn't really bury the competition, but it got them up there to be a serious competitor.

WP7 is a fucking mess. The UI shows they are trying too hard. Updates are a mess. MS needs to rethink completely or they will lose the consumer market. Get rid of Ballmer and stop copying Zune! Zune failed...I have a Zune HD.

Reminds me of the scene from "Funny Farm" where Chevy Chase says, "If I can't make any friends, I'll goddamn buy one!"

The thing is though, it kind of works. God knows how much money Microsoft has sunk into the Xbox franchise, Kinect alone supposedly had a half billion dollar marketing budget, but they're winning in sales, Kinect beat sales estimates and now the 360 generally outsells the PS3 and Wii (although not according to the latest weekly figures on VGChartz, but that's thanks to Killzone 3).

They did it via brute force and didn't really bury the competition, but it got them up there to be a serious competitor.

It's funny, because that's $1 billion thrown out the Windows. (see what I did there?)

For all the praise that WP7 has gotten from professional reviewers, I really don't see how it can compete against Android and iOS this far into the game. I know, Ars even published an article recently about how much the smartphone and tablet market has to expand, but I think that was overblown. It was compared to the PC market and how many PCs are out there, but PCs don't require a mobile data subscription...

Not to mention that Nokia has really dominated the low end, and smartphones are decidedly not the low end. (I know, they've had plenty of high end phones too, but I'm in the US and therefore US-centric)

ARS even published an article recently about how much the smartphone and tablet market has to expand, but I think that was overblown.

When Wimdows phone launched - I said the market was saturated already, and these events prove I was right. Anyone who thinks there is room in the smart phone market needs to take an economics 101 class.

Reminds me of the scene from "Funny Farm" where Chevy Chase says, "If I can't make any friends, I'll goddamn buy one!"

The thing is though, it kind of works. God knows how much money Microsoft has sunk into the Xbox franchise, Kinect alone supposedly had a half billion dollar marketing budget, but they're winning in sales, Kinect beat sales estimates and now the 360 generally outsells the PS3 and Wii (although not according to the latest weekly figures on VGChartz, but that's thanks to Killzone 3).

They did it via brute force and didn't really bury the competition, but it got them up there to be a serious competitor.

I wouldn't sell MS short on some of the good things they've done on the xbox. Better games. Best online experience by far. $100 for a 1 year XNA developer license, and they host an Indie section in the XBL marketplace. XNA really is a nice environment for getting into game development. The license also gets you a fairly full-featured modeling program (softimage mod) for creating your characters, models and animations.

It's like they are going to try and be like Apple when it comes to smartphones. It's not that bad of an idea. It could have the polish of iOS and multiple devices with a lack of fragmentation as in Android.

After all, Apple would benefit from having more then two models out at a time and Microsoft and Nokia could do that and it'd be a boom for the platform.

The article suggests but doesn't explicitly say that this deal prevents Nokia from developing Android phones. Is that actually the case? If not, why doesn't Nokia hedge its bets by developing Android phones as well? It could reuse form factors/design to the largest degree possible between the two platforms for greater economies of scale.

What other handset maker is going to stick with WP7 after this slice of favoritism?

If I was Samsung, et al, and sales of WP7 phones were rather lackluster, I'd be going to Microsoft and suggesting that I'm dropping all support of WP7 unless I get a sweetheart deal like Nokia. If Nokia probably won't get any WP7 phones out until sometime in 2012, how desperate would that make Microsoft to not lose their existing manufacturers in the meantime? Plus, they've already shown themselves more than willing to toss out money to get someone on the platform.

WP7 is a fucking mess. The UI shows they are trying too hard. Updates are a mess. MS needs to rethink completely or they will lose the consumer market. Get rid of Ballmer and stop copying Zune! Zune failed...I have a Zune HD.

In what way is it a "fucking mess"? I'm using an HD 7 next to my Android HD2 and the WP7 device is the cleanest interface out of the 2 and indeed, ALL the mobile OS on the market. It's also extremely simple to use. The only flourish is in the animation, which btw, is very unobtrusive. If being as subtle as possible is "trying too hard" I'd hate to hear what you think is "normal" for an OS... a calculator? There's no beating a calculator since the OS has zero UI.

Updates aren't a mess simply because we haven't had an update yet. The prepatch propblems hit 10% of samsung WP7 devices. I'll give you that, but I'd hardly call that a mess. Updates are messy for any company. It's not like idevices haven't bricked, crashed, slowed to a crawl etc and Android surely has made updates easy and freely available for all.

The point is, there will always be problems no matter who runs the OS.